Summary:
The yen fell as Japan's central bank hinted at further tightening, but timing remains uncertain, leaving markets unsure of action next month.
The yen fell on Monday after Japan's top central banker flagged further policy tightening ahead but left open the question of timing, leaving the market no clearer on whether a move would come next month.
Kazuo Ueda’s Gradual Rate Increase Plans and Japan’s Economic Outlook
Kazuo Ueda, Governor of the Bank of Japan (BOJ), has reiterated that interest rates will rise gradually if the economy develops as expected. He remains confident that the US is on track for a soft landing, thanks to recent positive economic data.
The yen experienced a significant rally to a 14-month high against the dollar in September as traders unwound yen-funded carry trades. However, it has since weakened, falling to its lowest level since July. Analysts suggest that the wide yield spreads between Japan and the US, coupled with potential inflationary policies under President-elect Donald Trump, continue to drive this trend.
Japan reported a current-account surplus of ¥8.97 trillion in the third quarter, but this was largely offset by notable direct and portfolio investment outflows. Direct investment in Japan remains one of the lowest among major economies, pointing to ongoing challenges in attracting long-term capital inflows. Despite these hurdles, Japan’s economy grew by 0.2% in the fiscal second quarter, marking the second consecutive quarter of expansion. However, a weak recovery and political uncertainty could lead to further capital outflows.
The downtrend of the yen is clearly visible on the chart, with the level around 156.80 per dollar serving as a potential support point. If the yen falls below this level, it could head towards 160.00.
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